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Modi avoids sensation with cautious first budget

Too bad Arun Jaitley couldn't promise not to re-open other old cases. Too bad Arun Jaitley couldn't promise not to re-open other old cases.
Too bad Arun Jaitley couldn't promise not to re-open other old cases. Bloomberg via Getty Images

India’s new government chose to do without radical new policies in its hotly-awaited first budget, but outlined plans that investors felt was true to its pre-election pledges of a more business-friendly policy.

The biggest surprise in finance minister Arun Jaitley’s speech to parliament was his decision to stick to the previous government’s target of keeping the budget deficit to only 4.1% of gross domestic product the fiscal year ending in March 2015.

Jaitley’s officials had said earlier this week that the country’s financial situation was worse than thought, prompting speculation that he would allow a bigger deficit this year, but Jaitley said he would “accept this challenge” and try to cut the deficit to 3.6% the next two years.

“We cannot leave behind a legacy of debt for our future generation,” he told parliament.

Jaitley promised to achieve growth of between 7% and 8% within three to four years, a rate that would ensure that India creates enough jobs for the 1 million people that are entering its workforce every month.

As flagged beforehand, the government raised the cap on foreign investment in defense and insurance companies to 49% from 26%, a move it hopes will encourage companies to put more of their technology to work in India.

He also outlined plans to reduce the differences in the tax regimes of India’s 29 federal states, in an attempt to create a more unified single market.

“We are committed to providing a stable and predictable tax regime which will be investor friendly and spur growth,” he said.

But there was no repeal of the law allowing “retrospective amendment” of past tax issues, which has frightened off foreign investors since being introduced in 2012. Jaitley said ongoing cases “will naturally reach their logical conclusion”, and that he would set up a committee to look at any new cases.

U.K. mobile network operator Vodafone Plc (VOD)  took the last government to independent arbitration in May after the last government ignored a ruling from its own Supreme Court to stop its attempts to claw back $2.6 billion in tax. Vodafone said Thursday it “noted” Jaitley’s comments and would continue the arbitration proceedings.

Other elements of the budget included commitments to bringing electricity, natural gas and clean water to India’s underdeveloped regions, which he said would be funded by public-private partnerships.  The last of those has gained particular attention after the international uproar by the gang-rape and murder of  two teenage girls while they were looking for somewhere  to relieve themselves in May.  Nearly half of India’s 1.25 billion population has no access to basic plumbing.

Jaitley also laid out plans for cheap loans for other infrastructure projects such as ports, airports and roads.

But there were few big splashes either on spending commitments such as subsidies for oil products and fertilizer, or on revenue-raising measures, beyond increased excise duty on cigarettes and sodas, and an increase in capital gains tax on fixed-income mutual funds.

Kiran Mazumdar Shaw, chairman of India’s largest biotechnology company Biocon, commented on her Twitter account that the budget had “good directional stuff but no bold reforms.”

India’s stock market took the budget positively, with the benchmark Sensex index rising 1% at one point, before a weak market opening in Europe led it to close down on the day. The rupee weakened slightly against the dollar to 59.94 by 0530 EDT, from an opening level of 59.59.